Saturday, October 10, 2009

The IMF Catapults from Shunned Agency ...

"A year ago", said law professor Ross Buckley {1} on Australia's ABC News last week, "nobody wanted to know the International Monetary Fund. Now it's the organiser for the international stimulus package which has been sold as a stimulus package for poor countries."

The IMF may have catapulted to a more exalted status than that. According to Jim Rickards {2}, director of market intelligence for scientific consulting firm Omnis, the unannounced purpose of last week's G20 Summit in Pittsburgh was that "the IMF is being anointed as the global central bank". In a CNBC interview on September 25, Rickards said, "They've issued debt for the first time in history. They're issuing SDRs. The last SDRs came out around 1980 or 1981, $30 billion. Now they're issuing $300 billion. When I say issuing, it's printing money; there's nothing behind these SDRs."

SDRs, or Special Drawing Rights, are a synthetic currency originally created by the IMF to replace gold and silver in large international transactions. But they have been little used until now. Why does the world suddenly need a new global fiat currency and global central bank? Rickards says it because of "Triffin's Dilemma", a problem first noted by economist Robert Triffin in the 1960s. When the world went off the gold standard, a reserve currency had to be provided by some large-currency country to service global trade. But leaving its currency out there for international purposes meant that the country would have to continually run large deficits, and that meant it would eventually go broke. The US has fueled the world economy for the last fifty years, but now it is going broke. The US can settle its debts and get its own house in order, but that would cause world trade to contract. A substitute global reserve currency is needed to fuel the global economy while the US solves its debt problems, and that new currency is to be the IMF's SDRs.

That's the solution to Triffin's dilemma, says Rickards, but it leaves the US in a vulnerable position. If we face a war or other global catastrophe, we no longer have the privilege of printing money. The dollar becomes just another currency. To avoid that, the Federal Reserve is hinting that it is prepared to raise interest rates, even though that would mean further squeezing the real estate market and the real economy. Rickards was referring to an oped piece by Fed governor Kevin Warsh {3}, published in The Wall Street Journal the same day the G20 met. Warsh said that the Fed would need to raise interest rates if asset prices rose - which Rickards interprets to mean gold, the traditional go-to investment of investors fleeing the dollar. "Central banks hate gold because it limits their ability to print money", said Rickards. If gold were to suddenly go to $1,500 an ounce, it would mean the dollar was collapsing. Warsh was giving the market a heads up that the Fed wasn't going to let that happen. The Fed would raise interest rates to attract dollars back into the country. "Warsh is saying, 'We sort of have to trash the dollar, but we're going to do it gradually'", Rickards observed. "Warsh is trying to preempt an unstable decline in the dollar. What they want, of course, is a stable, steady decline."

What about the Fed's traditional role of maintaining price stability? It's nonsense, said Rickards. "What they do is inflate the dollar to prop up the banks". The dollar has to be inflated because there is more debt outstanding than money to pay it with. The government currently has contingent liabilities of $60 trillion. "There's no feasible combination of growth and taxes that can fund that liability", Rickards said. The government could fund about half that in the next fourteen years, which means the dollar needs to be devalued by half in that time.

The IMF's $500 Billion Stimulus Package:Designed to Help Developing Countries or the Banks?

This all underscores another dilemma in the current monetary scheme, one that is even more intractable than Triffin's. There is never enough money to cover the outstanding debt, because all money today except coins is created by banks {4} in the form of loans, and more money is always owed back to the banks than they advance when they create their loans. Banks create the principal but not the interest necessary to pay their loans back. The Fed, which is owned by a consortium of banks and was set up to serve their interests, is tasked with seeing that the banks are paid back; and the only way to do that is to inflate the money supply to create the dollars to cover the missing interest. But that means diluting the value of the dollar, which imposes a stealth tax on the citizenry; and the money supply is inflated by making more loans, which adds to the debt and interest burden that the inflated money supply was supposed to relieve. The banking system is basically a pyramid scheme, which can be kept going only by continually creating more debt.

And that brings us back to the IMF's stimulus package discussed last week by Professor Buckley {1}. The $500 billion package was billed as helping emerging nations hard hit by the global credit crisis, but Buckley said that he doubts that is what is really going on. Rather, the $500 billion pledged by the G20 nations is "a stimulus package for the rich countries' banks".

Why does he think that? Because stimulus packages are usually grants. The money coming from the IMF will be extended in the form of loans.

"These are loans that are made by the G20 countries through the IMF to poor countries. They have to be repaid and what they're going to be used for is to repay the international banks now ... The money won't really touch down in the poor countries. It will go straight through them to repay their creditors ... But the poor countries will spend the next thirty years repaying the IMF."

Basically, said Professor Buckley, the loans extended by the IMF represent an increase in seniority of the debt.

"At the moment the debt is owed by poor countries to banks, and if the poor countries had to, they could default on that. The bank debt is going to be replaced by debt that's owed to the IMF, which for very good strategic reasons the poor countries will always service ... The rich countries have made this $500 billion available to stimulate their own banks, and the IMF is a wonderful party to put in between the countries and the debtors and the banks."

The IMF is back in business, but it's the old unseemly business of serving as the collection agency for the international banking industry. As long as third world debtors can service their loans by paying the interest on them, the banks can count the loans as "assets" on their books, allowing them to keep their pyramid scheme going by inflating the global money supply with yet more loans. It's all for the greater good of the banks and their affiliated multinational corporations, funded with $500 billion from the taxpayers of the G20 nations.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt (2007), her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust". She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from "the money trust". Her eleven books include Forbidden Medicine (1998), Nature's Pharmacy (1998), co-authored with Dr Lynne Walker, and The Key to Ultimate Health (2000), co-authored with Dr Richard Hansen. Her websites are www.webofdebt.com and www.ellenbrown.com.